Virginia’s Economy and Budget Need a Reboot

August 29, 2016

On August 26, Governor Terry McAuliffe announced that despite an FY 2016 State General Fund Budget that was built on fairly conservative revenue growth of 3.2 percent, revenues grew only 1.7 percent – a decline of $269 million from the official forecast. Other transfers to the General Fund (primarily other sales taxes) also declined an additional $10 million, leaving a total shortfall of $279 million from the adopted FY 2016 General Fund Budget.

Fortunately, FY 2016 appropriations were still covered because there were $265 million in unappropriated General Fund revenues in the adopted FY 2016 Budget, plus some additional available unspent appropriations at fiscal year-end.

The Governor also announced a new “interim” General Fund revenue forecast that assumes 1.7 percent growth instead of 3.2 percent for FY 2017, and 3.6 percent growth in FY 2018 instead of 3.9 percent. The Governor now expects a total shortfall from the adopted FY 2016-18 General Fund Budget of nearly $1.5 billion – due to the lowered revenue base going forward, revised lower growth rates, and the loss of carryforward unspent revenues in FY 2016 for expenditure in the FY 2016-18 Biennium Budget.

The General Fund revenue decline for FY 2016 was caused primarily by a shortfall in individual income and sales taxes. Individual income taxes (67 percent of the General Fund) grew 2.4 percent and sales taxes (20 percent of the General Fund) grew 1.9 percent, versus the forecast growth of 4.1 percent for each source. While Secretary of Finance Ric Brown explained that employment and wages met their forecasted growth targets, the growth was concentrated in lower paying jobs that do not produce the same amount of tax revenue. The new lower FY 2016-18 biennium revenue forecast – while still using underlying economics that do not forecast a recession – attempts to capture this new phenomenon of growth in lower paying jobs.

The nearly $1.5 billion biennium General Fund shortfall is comprised of an $843 million forecasted shortfall for FY 2017 and a $633 million shortfall for FY 2018. The Governor announced that he will start to address the FY 2017 shortfall prior to the introduction of the amended budget in December, including suspending $125.1 million in state employee, state-supported local employee and teacher salary increases as required by law. Another $221 million in contingent salary increases are currently cancelled for FY 2018. The reduced revenue for appropriation has also triggered the ability to use the state’s “Rainy Day” fund. About $845 million is currently in the Rainy Day Fund – with an option of withdrawing $378 million in FY 2017 and another $230 million in FY 2018 to help cover the above forecasted shortfalls. After available balances are taken into account, about $300 million for FY 2017 and $200 million for FY 2018 in budget reductions still need to be addressed – assuming that the contingent salary increases are not restored and all available Rainy Day Funds are used.

The Governor also made reference to increases in K-12 education from FY 2016 and pledged to protect those additional dollars as he works to address the shortfall.

VACo will continue to keep local officials apprised of the state budget scenario.